Sovereign wealth funds are at a turning point in the real
estate markets. Is it time to adjust their strategies or just
cash out?

Sovereign wealth and public pension funds grabbed a series of
headlines in 2014 as they bought up expensive properties in
developed markets. Prime office properties in so-called gateway
cities like London, New York and Paris attracted the lion's
share of sovereign funds' capital, accounting for $13.8 billion
of the $23 billion they spent on global real estate, according
to Sovereign Wealth Center data. Of the major business
centers, funds favored London, which received $4 billion
in investments in 2014. In the U.S., however, sovereign funds
looked beyond New York, the traditional favorite, and targeted
other major cities including Boston, Los Angeles, San Francisco
and Washington, D.C. In the U.S. capital alone sovereign wealth
funds bought four office buildings for a total of $733
million.

One of the biggest real estate stories of 2014 involved
Norges Bank Investment Management (NBIM), the arm of the
central bank that oversees the world's largest sovereign fund,
Norway's $880 billion Government Pension Fund Global. NBIM
announced that it would allocate 1 percent of its total assets
- over $8.5 billion per annum - to core real estate in
developed markets between 2014 and 2016. NBIM fell short of its
mark in 2014, deploying only $5.4 billion, as more competition
for prime commercial assets, often from Asian pension funds and
insurers, drove yields down and prices up.

Risking Up

Last year marked a turning point for sovereign wealth funds
investments in other asset classes. Known largely as
conservative investors, they started to embrace riskier
strategies, including direct investments in privately owned
technology and biotech companies. This developing trend had
major repercussions in real estate too. Funds allocated more of
their capital to logistics properties, for instance, as the
boom in online shopping drove demand for delivery hubs in
developed and emerging markets alike. Among the most active
funds in this subsector were the $589 billion Abu Dhabi
Investment Authority (ADIA) and Norway's GPFG. The two funds
formed separate partnerships with San Francisco-based logistics
juggernaut Prologis. ADIA teamed up with Prologis in China and
NBIM in the U.S.

Gingko Tree Investment, a unit of China's State
Administration of Foreign Exchange (SAFE), on the other hand,
targeted the more traditional retail sector, investing in two
U.K. shopping centers, located in Leicester and Bristol.
Overall, sovereign wealth fund foreign direct investments in
logistics, retail and industrial properties - primarily in
Europe and Asia - totaled $3.2 billion in 2014.

Real Estate Investments in 2014 by Subsector, (Value in $
Billions and % of the Total)

High Valuations

In some other prime property hotspots, such as Melbourne and
Sydney, a rush to buy real assets pushed up prices and some of
the more opportunistic sovereign investors, such as GIC, with
an estimated $315 billion in assets under management, decided
to divest. In November 2014, the Singaporean sovereign fund
sold an office tower at 175 Liverpool St. in central Sydney for
A$390 million ($337.4 million); it also put its Australian
industrial and logistics real estate portfolio on the market
for A$900 million. One of the first sovereign wealth funds to
enter the Australian real estate market, GIC now looks to be
taking advantage of high valuations and shifting its attention
to other economies in the region where entry prices are
lower.

Karaoke Booths

One of the countries GIC is targeting is Japan. Like other
government investors, GIC has been attracted by several
factors, including cheap mortgages, strong yields and a
strengthening economy. GIC's bullish stance on Japan was
illustrated in August 2014, when it paid Â¥170
billion ($1.6 billion) for the Pacific Century Place office
building in central Tokyo - this was the biggest property deal
in the country since the financial crisis.

Other sovereign investors are flocking to Japanese real
estate. In 2013 the Abu Dhabi Investment Council (ADIC) had
been part of a consortium that bought the Shiba Park office
tower in Tokyo for Â¥117 billion ($1.2 billion) in
2013, and in 2014 it committed a further $150 million to its
joint venture with Australia's Goodman Group, which owns a
portfolio of logistics properties including in Tokyo, Nagoya
and Osaka. Qatar Investment Authority (QIA), with an estimated
$304 billion in assets under management, made an even more
unusual investment in Japanese real estate. In January 2014 the
fund backed Singapore-based real estate investor Orange Grove
Capital Management's Â¥23 billion ($110 million)
purchase of 17 branches of the Round One Corp., a chain of
neon-lit bowling alleys and karaoke booths.

Diversification Strategy

Overall, QIA spent most on real estate in 2014, allocating
$6.2 billion across 14 deals. NBIM followed, buying 13 assets
worth $5.6 billion. GIC made the largest number of investments;
we recorded 21 purchases worth a total $4.1 billion. These
figures underscore the Singaporean fund's desire to diversify
its property portfolio: GIC often invests in emerging markets
where prices are generally lower than in developed ones.

All in all, sovereign wealth funds spent $23 billion on
property in 2014 - but with Norway yet to unleash its full
spending power on global real estate, we expect that number to
rise sharply in the coming years.

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